Your Finances: A look at some basic aspects of new tax law

The good news is, we didn't fall off the fiscal cliff; it was more like a slight stumble. When the majority of us were relaxing and recuperating on New Year's Day, Congress was busy getting down to the business of passing The American Taxpayer Relief Act of 2012. The act was passed on Jan. 1 and signed by the president a day later.

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By Laura Medigovich

recordonline.com

By Laura Medigovich

Posted Jan. 12, 2013 at 2:00 AM

By Laura Medigovich

Posted Jan. 12, 2013 at 2:00 AM

» Social News

The good news is, we didn't fall off the fiscal cliff; it was more like a slight stumble. When the majority of us were relaxing and recuperating on New Year's Day, Congress was busy getting down to the business of passing The American Taxpayer Relief Act of 2012. The act was passed on Jan. 1 and signed by the president a day later.

Here is a look at how the new act will affect you.

For individuals with less than $400,000 of taxable income and married couples filing jointly with less than $450,000 of taxable income (indexed for inflation from 2012):

Your long-term capital gain and qualifying dividend rate will remain the same at zero percent for those in the 10 percent and 15 percent tax brackets, and 15 percent for those in the 25 percent to 35 percent tax brackets.

The 2 percent Social Security payroll tax holiday has ended. It returned to the 6.2 percent level it was two years ago. This means that you will receive about 2 percent less in your paycheck (up to the wage base of $113,700). To put this in perspective, if you earn $50,000, a year you will receive about $1,000 less.

For individuals with more than $400,000 of taxable income and married couples filing jointly with more than $450,000 of taxable income (indexed for inflation):

Your marginal income tax rate will increase to 39.6 percent

Your long-term capital gain and qualifying dividend rate will increase to 20 percent. Additionally, keep in mind the 3.8 percent surtax from the Affordable Care Act will also begin in 2013 for high-income earners. In essence, this means a 23.8 percent capital gain tax rate.

The 2 percent Social Security payroll tax holiday has ended for you, as well. This means the first $113,700 of your paycheck will be taxed an extra 2 percent.

The estate tax, gift tax and generation-skipping transfer (GST) tax are unified with a $5 million exemption (indexed for inflation from 2010), making the 2013 exemption $5.25 million. The tax rate has increase to 40 percent from 35 percent for amounts greater than the exemption.

The portability rules that allow spouses to effectively share their estate tax exemptions were made permanent.

Please keep in mind all of the above refers to federal tax rates only.

The 2012 Tax Act has many other provisions. I will highlight some of these other provisions and explore how they might affect you over the next few weeks.

Additionally, the Tax Act addressed a fraction of the issues commonly described as the fiscal cliff. The across-the-board federal spending cuts known as sequestration were not addressed in the act.

That issue was postponed for two months, allowing the legislators more time to find a resolution before these significant spending cuts take effect.

Laura Medigovich is a certified financial planner and vice president for M&T Bank's Hudson Valley region. The views expressed by the author are her own and are not endorsed by M&T Bank, M&T Securities or their affiliates.